The Market Is Expecting $850 Billion NEW QE

Last week we discussed what the expectations were for Draghi’s OMT – approximately EUR250bn – which coincidentally provided cover for the rest of the year (conditionally) for the entire new issuance of the European Union. Based on EURUSD’s recent exuberance – something we saw ahead of QE1 and QE2 – the market is now more than primed for some serious USD debasement. The current EURUSD of 1.2850 implies a Fed-to-ECB balance sheet ratio around 1.11x. If we assume the ECB wil not have to fire its conditional bazooka (of which is priced in 100% likelihood of EUR250bn), then the Fed is expected to conjure a monetization scheme of around USD580bn – anything less would be a disappointment to the market. However, if we assume the ECB will be doing it’s bond-buying monetization thing – as per the equity market’s expectations – then the Fed will need to come to the table with a bag of swag around USD850bn in order to debase the USD just enough to regain some hope. It seems like the market has priced in a great deal of monetary policy exuberance – especially considering how ‘confident’ consumers appear to be.

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